HP struggle continues as Q1 profits fall

Vendor narrowly beats the pessimistic outlook of Wall Street analysts, but firm still suffers drop in revenue and profits

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If the messaging of HP's Global Partner Conference in Las Vegas was a mashup up of “I Feel Good” and “What a Wonderful World,” the reality check that was HP’s Q1 earnings report was a slow-jam version of “A Hard Rain’s a Gonna Fall.”

While the vendor narrowly bested the pessimistic outlook of Wall Street analysts, the news was mostly grim across the board for HP, which saw revenues fall six per cent from a year ago to $28.4bn.

Profits were down as well, off 16 per cent to $1.2bn year on year. Operating margins dropped from 6.8 per cent to 6.2 per cent.

Putting the best face on the red ink, a chipper-sounding chief executive Meg Whitman said the numbers were “not where we want to be… but better than we expected. We’ve done what we said we’d do.”

Wall Street analysts had predicted even lower quarterly revenues of $27.8bn. HP stock was up $1.10, or 6.5 per cent, to $18.20 in after-hours trading.

“Our primary focus is to deliver on the full year outlook, and I feel good about the rest of the year,” Whitman added.

While company officials portrayed the less-bad than expected results as proof of the efficacy of what Whitman termed the vendor’s multi-year “fix and rebuild” effort, there were few bright spots on the HP ledger, particularly for those with an interest in reselling the company’s wares.

Revenues for the company’s beleaguered Personal Systems Group, which makes desktop PCs, notebooks, workstations and other client devices, plummeted eight per cent from a year ago to $8.2bn.

The hemorrhaging was particularly bad in the notebook space, where revenues were down 16 percent and the number of units sold was down 14 per cent. Desktop revenues inched up a scant four per cent, but it wasn’t enough to buoy PSG, which reported profits of $223m, a drop just over 50 per cent year on year.

The news wasn’t much better in HP’s printing division, where revenues fell five per cent to $5.9bn while profits and number of units sold both suffered double-digit percentage declines.

The withering results sparked the requisite questions from analysts concerning the wisdom of breaking up the company into separate units. “”We have no plans to break up the company,” Whitman emphatically told the telephone audience on the company’s conference call Thursday.

“Customers want this company to be together.”

Financial results for HP’s Enterprise Group, which delivers the vendor’s big-ticket servers, storage, networking, and business critical systems fared only slightly better. Overall unit revenues fell four per cent to $7bn despite a slight four per cent uptick in networking sales. The boost wasn’t enough to overcome a 13 per cent decline in storage revenues and a precipitous drop of 24 per cent year over year in BCS sales.

Despite that, Whitman said she was generally pleased with the group’s performance. New storage products are expected to turn around that division and the vendor expects to a newly stabilized server business to grow x86 marketshare by about one per cent annually going forward.

Software, which had been seen as a bit of a bright spot last quarter, slipped back into the red, dropping two per cent on revenues of $926m. The unit’s operating profit of $157m was essentially flat year over year, but represented a decline of almost 51 per cent from Q4 2012. Enterprise services were likewise off seven per cent from Q1 2012 to $5.9bn and profits were down a staggering 81 per cent from the previous quarter.

Viewed regionally, HP did not fare much better. Revenues were essentially flat in Asia, while the Americas took a three per cent dip and EMEA fell 11 per cent from the year-ago quarter.

The HP revenue report came just two days after rival vendor Dell posted an 11 per cent drop in revenue to $14.3bn for its fiscal Q4 and a sizable eight per cent dip over the fiscal year to $56.9bn.

“The turnaround is on track and we did better than we expected we would,” HP’s Whitman said in closing. “The patient showed some signs of improvement and we should be encouraged by that. While there’s still a lot of work to do to generate the kind of growth we want to see, our turnaround is starting to gain traction as a result of the actions we took in 2012 to lay the foundation for HP’s future,” Whitman added.